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University of Groningen
Faculty of Economics and Business
Master's Thesis IB&M (semester 2)
EBM719A20.2019-2020.2
How does internationalisation influence firm performance of small-
medium enterprises?
2 ABSTRACT
This study examines the influence of internationalization, a fundamental entrepreneurial strategy, on the firm performance of small and medium-sized enterprises (SMEs). In addition, the importance of networking during SMEs’ internationalization process is highlighted and assessed as a moderator in the main relationship. Using theories and concepts derived from international business literature, three hypotheses are formulated that relate to the effects of exportation, one of the two major strategies of internationalization, on the financial performance of overseas SMEs. A sample of 280 European SMEs has been selected to explore these hypotheses, and the results indicate a positive relationship between the internationalization and profitability of SMEs. Networking is examined based on both micro- level variables, via corporate relationships, and macro-level variables, with the use of subsidiaries. Contrary to the expectation of the hypothesis, the results demonstrate a negative moderate relationship of networking through subsidiaries on the SME internationalization- firm performance relationship. Finally, this study found no significant results for the moderate impact of corporate relationships on the internationalization-firm performance relationship of SMEs.
3 TABLE OF CONTENTS ABSTRACT ... 1.INTRODUCTION ... 4 2.LITERATURE REVIEW ... 7 3.HYPOTHESIS DEVELOPMENT ... 13 NETWORKING 3.1 ... 5
4.DATA AND METHODOLOGY ... 19
SAMPLE CHARACTERISTICS 4.1. ... 21
VARIABLES 4.2 ... 22
PRELIMINARY DATA ANALYSIS 4.3 ... 26
5.RESUTLS ... 28
6.DISCUSSION ... 34
7.LIMITATIONS AND FUTURE RESEARCH ... 37
8.CONCLUSION AND CONTRIBUTION ... 38
9.REFERENCES ... 40
4 1. INTRODUCTION
Throughout recent decades, globalization has played a significant role in the development of the business world and has rapidly increased its momentum across markets all over the world. One of the most important features of globalization is internationalization, the process by which companies design new products and services that are expandable into the international marketplace. To adapt to this continuously globalizing world, both large and small-medium-sized enterprises (SMEs) have adopted various methods of internationalization as a means of enhancing their firm performance and optimizing their profitability (Oviatt and McDougall, 1994). But, whilst this relationship has been extensively examined in relation to large-scale companies, the application of this research to assess the firm performance of SMEs remains limited (Almor and Hashai, 2004). This is important since international business and entrepreneurship theories provide contradictory perspectives on internationalization and firm performance relationship in the context of SMEs.
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firm size (Cavusgil and Tamer 1980; Julien, Joyal, and Deshaies 1994; Ali and Swiercz 1991). Thus, the smaller size of SMEs compared to large firms is not necessarily a disadvantage for SME international competition. In fact, small-scale may be an advantage over large enterprises in the competitive field, because a smaller size allows for greater flexibility which is a unique feature of SMEs. In turn, this flexibility can enable them to exploit global market opportunities more rapidly and efficiently than larger companies. According to European bank of reconstruction and development (EBRD) (2015), 99% of total international enterprises are SMEs and as per Organization for Economic Cooperation and Development (OECD) (2005), the rate of international SME growth is significantly faster than before. Thus, evidence seems to indicate that SMEs are not faring as poorly as expected in reality. Therefore, it becomes important to know the nature of the relationship between internationalization and firm performance in the context of SMEs.
This study aims to shed light on the issue by exploring the underlying mechanisms behind the impact of internationalization on the finance-related firm performance of SMEs. Managers are highly concerned with the question of whether internationalization can raise the profitability of an SME, as well as other factors that can boost its financial performance; they should acknowledge the guidelines through which SMEs can raise their competitive performance when expanding geographically. Hence, this study seeks to answer: How does internationalisation influence firm
performance of small- medium enterprises and what is the moderating effect of networks?
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advantage. Moreover, this unique characteristic of flexibility allows SMEs to take full advantage of opportunities that arise through their network relations. Thus, networking can positively impact the relationship between internationalization and SME financial performance. As a result, this study includes networking as a moderating variable in the relationship.
This study bases these inferences on the analysis of secondary data comprising 280 European SMEs’ internationalization activities headquartered in 7 European countries, spanning the 2016-2018 period. The data is derived from the Amadeus database of Bureau van Dijk and the Dun & Bradstreet database. Throughout this paper, internationalization is examined in terms of exports via the ratio of exports, while firm financial performance is measured with the use return on assets (ROA). Networks are separated in two categories, namely micro and macro level networks, and are measured with the use of corporate relationships and subsidiaries respectively.
The findings confirmed the first hypothesis with regard to the positive relationship between internationalization and firm performance of an SME. Moreover, while the networking via the corporate relationships did not have significant results, the networking through subsidiaries found to have a negative moderating impact in the main relationship.
7 2. LITERATURE REVIEW
The term ‘global’ became mainstream in the 1980s and firms were encouraged by academics as well as media to expand their operations geographically. Internationalization can be defined as “the process of increasing involvement in international operations” (Welch and Luostarinen (1988, p. 36). At the beginning of 1980, SMEs were considered as internationally low-advancing firms due to their many financial and managerial shortcomings (Golinelli, 1992; Oviatt & McDougall, 1994). However, throughout recent years, a literary focus on SME internationalization has gained significantly more attention.
Because the geographical expansion of firms has become such a prominent area of research for both theoretical and empirical scholars, several models of internationalization have emerged as attempts to cover the full spectrum of theoretical perspectives on the topic. The most well-known theories are the Transaction Cost Theory (TCE) (Williamson, 1971, 1975; Hennart, 1982), the Eclectic Paradigm (also known as OLI) (Dunning, 1988, 1994), the Uppsala model (Johansson and vale, 1977), the Resource-Based View (RBV) (McDougall et al. 1994) and the Network Theory (Johanson and Vahlne 1990).
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the internalization of economic activities across borders to overcome imperfections in cross-border transactions, which are subject to market failure (Buckley & Casson, 1976; Rugman,1981; Hennart, 1982). The Uppsala Model has two fundamental characteristics: firstly, it contains a model of stages which describes the four steps firms normally take when they start operating abroad (Johansson and Wiedersheim-Paul, 1975) which show a gradually increasing commitment to the new market; no regular export activities, export via independent representative, sales subsidiary, and lastly production/manufacture. The second characteristic is the psychic distance; it is the phenomenon by which companies first expand their operations to culturally and/or geographically close countries and later move towards more distal cultures and/or locations after enhancing their international understanding.
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Researchers specializing in strategic management and international business have thoroughly examined the relationship between international diversification and the firm performance of large enterprises. Various conclusions drawn from empirical research infer that a high level of internationalization will generally increase financial performance. However, this increase only occurs up to a certain point, after which firm profitability tends to lessen while internationalization continues to increase (Geringer, Beamish, and daCosta, 1989; Hitt, Hoskisson, and Kim, 1997). Regardless of this correlational direction, research on the internationalization-performance relationship of SMEs remains sparse, even though it has been extensively examined in literature with respect to large firms (Almor and Hashai, 2004). Various factors related to risk perception, motives, financial and non-financial resources, organizational structures, capabilities and decision-making speed separate SMEs from their larger counterparts. This implies that SMEs and large enterprises cannot be compared. As a result, conclusions drawn from research on the internationalization-firm performance relationship of larger enterprises do not necessarily apply to SMEs. Furthermore, these factors that separate SMEs from larger firms could substantially affect the outcome of SME internationalization. The extent of this depends on the internationalization policies of individual SMEs, in which a wide variance exists. To highlight this variance between different SMEs, multiple studies have been conducted on the SME internationalization-performance relationship which have produced inconsistent results: some with positive results, some with negative results and others with no significant results.
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confirm their hypothesis regarding the U-shaped relationship between foreign direct investment (FDI) and firm performance. On the other hand, Pangarkar (2008) and Chelliah et al. (2010) found support for the hypothesis which argued that there is a positive relationship between internationalization and firm performance through exportation. In their research, internationalization was measured using percentages obtained from factors such as foreign sales and international profits. Finally, Singla, C. and George, R. (2013) obtained insignificant results for their hypothesis regarding the positive impact of internationalization, through exportation, in the profitability of a SME. Nevertheless, they found support for their hypothesis which predicted a negative relationship between internationalization via FDI and the financial performance of an SME.
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procurement) of most SMEs result in further challenges for them compared to their larger counterparts (International Trade Centre, 2003). Aside from the need to develop new capabilities and resources while undergoing foreign expansion, an internationalizing SME will often be faced with the challenge of minimizing various operational risks that arise from the foreignness of a new environment (Delios and Henisz, 2000), particularly those risks relating to political and institutional aspects of business. The exact level of risk depends on the business characteristics of an SME’s distinct internationalization strategy. Finally, an SME with one or more subsidiaries will likely have to deal with extra costs related to monitoring and managing these subsidiaries which in turn would be harmful for an SME with scarce resources.
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marketplace conditions (Policy Brief, 2000). Andersson (2000) also advocates for the importance of flexibility in small firms and elaborates by listing two further assets that are only made possible due to flexibility: first, SMEs are able to adopt the use of newly emerging technologies; second, they are capable of incremental innovation. Therefore, it is expected for SMEs to be able to easily adapt to the new environments of various host countries. Overall, flexibility is a quality that is unique to SMEs, placing them at an advantageous position compared to larger firms. The ability to be flexible enables SMEs to make the most of benefits that arise through networking; in turn, networking can have a detrimental impact on SME internationalization. Lastly, evidence suggests that SMEs are not faring as poorly as expected in reality. Report EU-28 indicates that SMEs made strong contributions to the European recovery from the financial crisis; 47% of the total increase from 2008 to 2017 in the value added generated by the non-financial business sector and 52% of the cumulative increase employment in the sector. Thus, it becomes essential to know: How does
internationalisation influence the firm performance of small-medium enterprises and what is the moderating effect of networks?
14 3. HYPOTHESIS DEVELOPMENT
Despite the multiple benefits, internationalization comes with multiple potential costs and risks for SMEs, stemming from their small size. The major disadvantage for SMEs, namely their limited resources, is accompanied with further burdens resulting from their slow payment process and guarantee requirements. Moreover, banks are often unwilling to offer loans to SMEs, because their lack of track record experience with SMEs leads them to perceive the act as too ‘risky’. Lastly, liability of foreignness (LOF), i.e. the phenomenon by which companies experience additional costs in host countries due to their non-native status, may be greater for SMEs compared to larger firms, since institutional and political risks may result in extra costs for maintaining specialized managerial skills. In turn, this can harm the financial performance of an SME.
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Although being small can create additional burdens for SMEs, a small size can also be beneficial. One of the most important benefits is that smallness can result in partial immunity to the liability of foreignness for SMEs compared to their larger counterparts; SMEs face less reaction from incumbents in foreign markets and attract less undue attention from local stakeholders. Moreover, by choosing the appropriate internationalization strategy, SMEs can gain rapid access to a diverse market range using minimal capital investment, boost their international experience (Root, 1994; Zahra et al., 1997; Sullivan and Bauerschmidt, 1990) and achieve a high economic scale. In turn, these benefits lead to an increase in profitability.
Based on this cumulative knowledge, the first hypothesis is hereby presented:
Hypothesis 1: There is a positive relationship between the internationalization of an SME and its
financial performance.
3.1. Networking
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manage their network relations and gain insight into how to pursue opportunities that arise through networks. Moreover, their advantage of flexibility over larger enterprises allows them to develop a better understanding and communication with members of their networks. Thus, networking has an overall positive effect on SME internationalization; in fact, SMEs gain even more benefit from networking than larger firms.
Throughout this study, a network is defined as ‘the relationship between a firm’s management team and employees with customers, suppliers, competitors, government, distributors, bankers, families, friends, or any other party that enables it to internationalize its business activities’ (Axelsson & Johanson, 1992; Sharma & Johanson, 1987). As such, the variables that constitute networking can be separated into two types: firstly, micro-level variables involve all individuals within the firm and their social relationships such as with employees, suppliers, managers etc., and secondly, macro-level variables are the unified entireties of networks created through subsidiaries.
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Results obtained from a study on Australian SMEs indicated that the initiation of internationalization strategies were primarily based on the decision-maker’s pre-existing social network (Ellis & Pecotich, 2001). Network theory states that a firm’s internationalization process is never entirely based upon individual effort; rather, the outcome is determined by a combination of both formal and informal network relations established by the firm as a whole. According to Burgel & Murray (2000), companies can achieve rapid internationalization through collaboration, because this can help them to minimize risks. More specifically, social networking can enable firms to build credibility and mutual trust with other members (Chetty & Patterson, 2002). SMEs can take full advantage of collaborations due to their unique features of flexibility and locality. Additionally, Hamilton (1991) pointed out that business networks, in the form of social networks, do not only provide competitive advantages but also reduce transaction and search costs for buyers; such costs would be extremely heavy for SMEs who lack financial resources. Therefore, the expected result of collaboration and general corporate relationships on SME financial firm performance is generally positive. Hence, the second hypothesis is:
Hypothesis 2.a.: The positive relationship between the internationalization of an SME and its
financial performance is positively moderated by its micro-level networking. In other words, with increasing levels of internationalization and micro-level networking, financial performance of SMEs is likely to be higher.
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through subsidiaries can create more meaningful relationships with a focal SME. Consequently, an SME can obtain further experience in terms of managing both their partners and network sizes. However, it is also necessary to consider the drawbacks related to owning local and/or foreign subsidiaries. The main drawback is that networking with subsidiaries can increase managerial and monitoring costs for the focal SME. Additionally, as mentioned before, SMEs are in a disadvantageous position over large firms with regard to financial resources, hence owning multiple subsidiaries may have adverse negative effects on their financial firm performance. Lastly, recruiting, training and monitoring of the new employees of the subsidiaries costs employees’ and managers’ time, which is a unique resource and its distribution has a substantial effect on the profitability of the firm (Juster and Stafford; 1991).
Based on the aforementioned knowledge, it can be argued that subsidiary networking can largely benefit SMEs. Even though the scarcity of their resources will likely prevent SMEs from having many subsidiaries, this can be seen as beneficial because having few subsidiaries minimizes their managerial costs. Thus, the advantages of subsidiary networking outweigh the disadvantages; moreover, networking through subsidiaries will have a positive moderating effect on the relationship between internationalization and profitability for SMEs. Therefore, the next hypothesis is:
Hypothesis 2.b.: The positive relationship between the internationalization of an SME and its
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Conceptual model:
4. DATA AND METHODOLOGY
The previously discussed internationalization-financial performance relationship and the moderating impact of networks on this association will be studied using a quantitative approach.
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just one of two possible streams: either on new ventures (born-global firms, start-up firms), or on SMEs that have already been established for many years (McDougall & Oviatt, 2000). To counter this narrowness, this study includes SMEs belonging to both types of stream, aiming to promote a broader understanding of the topic.
Following the European Commission's definition of an SME, the sample is limited to SMEs headquartered in seven different European countries (Estonia, France, Germany, Greece, Slovenia, Croatia, United Kingdom). Unfortunately, data on the topic was only available for these countries. For this study, a three-year (2016-2018) panel of data has been constructed.
The secondary quantitative data included in this study has been derived from databases made available for students of the University of Groningen, as well as from some publicly available sources. The data for the dependent variable (financial performance), the independent variable (exporting), and for certain control variables (size, age, leverage, ownership) is obtained via Orbis databases published by the Bureau van Dijk. Orbis provides information about more than 365 million private companies worldwide, 21 of which operate across Europe. Furthermore, some of these databases contain information about the financial conditions of a firms as well as its product diversity, R&D etc. Hence, Orbis databases cover all the data needed for this study. For the variable of networking, data has been obtained from the Dun & Bradstreet Corporation (D&B) database. Founded in 1841, the D&B database provides business records for over 300 million companies worldwide regarding analytics, commercialism and general insights for firms.
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average 49.45, while Greece tends to export less, 13.94 and 6.2 respectively. In general, almost all European SMEs use exports to some degree.
4.1. Sample characteristics
Entrepreneurial firms can be defined on the basis of multiple criterion, commonly using demographics, performance and behavioural characteristics (Stevenson & Jarillo, 1990). This study emphasizes the first two criteria: demographic features constituted by size, age and ownership, and performance constituted by profitability, which in accordance with previous studies, related to this topic, such as McDougall and Oviatt (2000), Lu & Beamish, (2001) etc.
With regard to demographics, this study included the characteristic of firm size. Using the definition of the European Commission (2009), the sample is confined to small and medium-sized enterprises. Moreover, the criteria involving age, ownership and leverage are used in the regression analysis as control variables. For the performance category, the criteria involving financial firm performance is used. Profitability is a major concern of every entrepreneur; consequently, it is vital to examine the characteristics that maximize and minimize profitability.
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can observe how this relationship has changed due to the dynamic nature of a wider European economic context, from the perspective of almost a decade later.
The only firms selected are those with data available from 2016-2018 on the following variables: return on assets (ROA), annual growth in sales, export ratio, number of employees, equity ratio, corporate relationships, number of subsidiaries; moreover, this information should be available in both the Orbis and D&B databases. This results in a sample of n=280 companies. According to the formula conjectured by Tabachnick & Fidell (2007, p. 123), an adequate sample size is equal to N>50+8 per independent variable. Therefore, the sample of 280 companies fulfils this requirement. Table 1 presents the details of this sample.
4.2.Variables
The models of this study analyse the annual performance of SMEs from 2016-2018. To conduct the analysis, a record covering a three-year period has been created. Parent firm financial performance is the dependent variable for all the models. The main independent variable is internationalization, tested via exporting activity. The moderating variable of networking is separated into two distinct categories; networking created via corporate relations and networking occurring via subsidiaries. Moreover, a number of control variables are included to account for other determinants known to affect financial performance.
Dependent variable
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performance relationship. This indicator measures the profitability of a firm with respect to the total assets the owners have provided for the business. Other commonly used indicators for profitability are return on sales (ROS), net income per employee, return on equity (ROE), net profit and net margin (Tallman and Li, 1996; Lu & Beamish, 2001). However, this study chose to select ROA for various reasons. Firstly, ROA allows this study to be directly compared to prior studies (e.g., Chao & Kumar, 2010; Lu & Beamish, 2004; Vermeulen & Barkema, 2002). Bausch and Krist (2007) examined the indicators adopted in 95 studies and found that in 27% of the studies ROA was chosen as a measure. Moreover, ROA is considered a reliable indicator of the extent to which firms have developed economies of scope and scale which are closely related with the process of internationalization.
Independent variable
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considerable profit share appropriation by international trade intermediaries. According to the OECD (2019), SMEs may choose indirect exports, mainly in sectors where scale matters, because indirect exports grant SMEs access to overseas markets and new sources of growth without incurring trade-related costs.
According to Ramaswamy et al. (1996), exporting is usually measured via the ratio of export: for example, export revenue by the operating revenue. Consequently, this study will use this type of ratio to allow comparison with other studies and because several researchers have pointed out that this ratio is a good indicator of exporting activity.
Network
Having examined multiple studies on the SME - network relationship, it has been observed that these studies either used qualitative methods, case studies and/or a purely theoretical basis. On the contrary, this study uses quantitative methods and examines the two different levels of networking, using data from the Dun & Bradstreet and Orbis databases.
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Control variables
26 4.3.Preliminary data analysis
In this thesis the aforementioned hypotheses are examined by performing a multiple linear regression analysis based on (Ordinary Least Squares) through the software IBM SPSS Statistics (Version 25). Before testing the main regression analysis, it is imperative to examine if the variables and the data meet the assumptions that are demanded for linear regression to result in a valid outcome.
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Moreover, the existence of significant deviations that potentially bias this model need to be recognized to assure that the results of the regression is valid. Some potential deviations are the boxplots developed by SPSS. However, Hoaglin & Iglewicz (1987) pointed out that the outliers identified by SPSS may not be recognized as such since they do not indeed impact the regression line. Hence, no outliers influence the sample.
Multicollinearity is examined using the variance inflation factor (VIF) in order to ensure that no correlation exists between the predictors and hence the exclusive effects of the variables will be evaluated. As shown in the table 3 in the Appendices, all values are below the maximum threshold of 10 and tolerance levels are greater than 0,10 (Acock, 2010). Therefore, no multicollinearity occurred in this thesis.
Moreover, the Durbin-Watson test for the independence of errors is examined to test whether the error terms are uncorrelated. As presented in the table 4 in the Appendices, the result is 2.068 which validates the independence of error; the accepted range of 1.5 and 2.5 (Field, 2009).
Lastly, the heteroskedasticity test is conducted via a scatterplot of the standardized residuals since it can result in contradictory estimates (Field, 2009). Table 3 presents the heteroskedasticity of the variables of this study and the scatter plot seems to have a random distribution. Consequently, this assumption is also met (Hayes, 2013).
Robustness tests
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Profit, operating profit, Cash flow) and Return Ratios (Returns on Assets, Return on Invested Capital, Return on Equity (ROE). For the robustness test, this study uses another return ratio, ROE, which presents the percentages of net income to shareholder’s funds.
5. RESULTS
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The correlation matrix reveals correlations between the financial performance of a SME (measured with the use of ROA) and the majority of the other variables. Corporate relations are correlated with only one variable (subsidiaries). In addition, the correlation matrix table indicates a strong correlation between the variables of size and subsidiaries, and between the variables of sector and exportation.
Tables 2, 3 and 4 display results for the 280 European SMEs, the 70 start-up/new ventures SMEs and the 210 already-established firms. In general, the results for both the total sample and the two sub-samples, lead to similar conclusions.
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Table 3. Regressions of return on equity (ROA) on export: 70 new ventures - European SMEs, 2016-2018
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Table 4. Regressions of return on equity (ROA) on export: 210 well- established European SMEs, 2016-2018
Model 1 Model 2 Model 3 Model 4
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Models 2 in Tables 2, 3 and 4 tested Hypothesis 1, which predicts that exporting activity is positively related to the financial performance of a SME. Consistent with this prediction, exporting activity was found to be positively correlated with a SME’s profitability in all the three samples, with p < 0.01. Highly interested in the R-square for this model. Whilst in tables 2 and 4 the variables explain approximately 15%, in table 3 model 2 explains 38% of the dependent variable (firm financial performance). Therefore, it can be argued that if start-up firms choose to internationalize via exporting, it can boost their profitability to a very high degree compared to well-established SMEs.
Hypotheses 2.a. and 2.b predict that the level of networking, originating from either corporate relations or subsidiaries, has a positive moderating effect on the relationship between internationalization and firm profitability. In all tables, the variable of corporate relationships is shown to have both insignificant direct and moderating effects on the main relationship. Moreover, contrary to the prediction of Hypothesis 2b, macro-networking through subsidiaries negatively moderated the internationalization-profitability relationship of an SME. Additionally, networking via subsidiaries was found to be insignificant in the sub-sample regarding only the new ventures. Finally, the results of the robustness test can be found in table 5 . All the models indicate almost the same results with the first regression model. Only the control variable of industry had insignificant results in some models. Hence, it can be concluded that in general the results are not robusted.
34 6. DISCUSSION
Due to the growing prevalence of internationalization being adopted by SMEs as a fundamental entrepreneurial strategy, the main objective of this thesis was to examine the impact of this strategy on SME financial performance. In later sections, one of the two major internationalization strategies (exportation), as well as both main types of networking (corporate relations and subsidiaries), were explored in relation to the financial performance of a sample consisting of various small and medium-sized European firms.
In light of the growing importance of SMEs in Europe, this thesis investigated the internationalization-firm performance relationship in the sample consisting of 280 European firms. This relationship has been extensively analysed in literature referring to large companies, but not with regard to SMEs. Moreover, it is problematic to apply this research on large firms to SMEs, because they are fundamentally different; their internationalization and managerial strategies are distinct from those of larger enterprises (Dana et al., 1999; Wyer and Smallbone, 1999; Zucchella and Maccarini, 1999) due to internal differences, such as the amount of resources. Thus, SMEs should not be treated as clones of large firms. Instead, novel research is necessary to understand the internationalization-performance relationship within the scope of SMEs; hence, this study provides further insights and understandings with regards to the influence of internationalization on SME financial performance.
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argued that SMEs have strong exporting potential and the ability to compete with larger firms. Due to the insufficient resources of most SMEs, networking can aid SMEs in gaining the necessary competitive advantages. Therefore, this study investigated the moderating effect of networks in the export-financial performance relationship. The impact of macro-level networks of SMEs was found to be significant, but despite the positive prediction this significant effect turned out negative. Moreover, micro-level networks did not produce any significant results.
With respect to the first hypothesis, evidence to verify the positive relationship between the level of SME export activities in a European context and their financial performance was found. The findings are in line with the aforementioned economic arguments such as cost benefits, scale and scope, and access to international knowledge and information. Generally, the results demonstrate that internationalization through exporting in European countries can boost the profitability of SMEs and motivate them to continuously expand their operations to foreign markets through exportation.
The results confirm the findings of Baird et al. (1994) which indicate a positive correlation in the main relationship; SMEs can improve their financial performance by internationalizing their products to overseas markets. Contractor et al. (2003) also pointed out this positive relationship. Multiple studies, including Lu & Beamish (2001) (2006) and Majocchi & Zucchella (2003), have examined the relationship between export activities and SME financial performance. Both studies failed to find support for their hypotheses regarding exportation. Lu & Beamish (2001) argued that the negative impact of exportation on the profitability of Japanese SMEs was due the appreciation of the Yen.
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the corporate relations variable deducted by the Dun & Bradstreet database. Previous studies have confirmed the positive relationship between networking and SME financial performance, but they did not examine networking as a moderator. Moreover, all previous studies have examined the aforementioned relationship using qualitative data via methods such as interviews or survey questionnaires (Camisón, C., 2008, Musteen, M., Francis, J. and Datta, D.K., 2010, Talukder, M., Quazi, A. and Djatikusumo, D., 2013). Networking includes many objectives. Some of these, such as employee-customer relations, are difficult to detect and hence quantify. Moreover, informal relations are usually undetectable and are therefore not measured in studies. Because of this multitude of variables that constitute networking and the difficulty in quantifying some of them, quantitative data may not be an appropriate method for measuring micro-level networking. Hence, a qualitative analysis of networking is believed to confirm hypothesis 2a.
37 7. LIMITATIONS AND FUTURE RESEARCH
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strategy. Another innovative idea would be to implement last year’s ‘new’ resource of crowdfunding into research. Paniagua, et al. (2017) pointed out that internationalization strategies such as FDI and exporting, which are closely related to credit challenges, can use crowdfunding as an international financial resource; based on this, a final suggestion for future research would be to examine the impact of crowdfunding on the internationalization process of SMEs, firms that are commonly depicted as resource-restrained.
8. CONCLUSION AND CONTRIBUTIONS
Despite the limitations, this study makes a meaningful contribution to literature regarding internationalization and entrepreneurship; furthermore, it provides fruitful insights for managers and practitioners: for example, it shows that by using exportation managers can optimize the financial performance of their firms when choosing to internationalize. Financial performance is commonly a major goal of firms and hence further knowledge on how to enhance this is remarkably useful for managers. A further implication of this thesis for managers is that exportation is not very costly or risky for SMEs, as opposed to FDI; while larger firms often choose to cross-border via FDI, SMEs tend to use exportation as their major international strategy to ensure success abroad. Thus, exportation should not be underestimated.
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macro – networking variables; second, general networking established by corporate relations, i.e. micro – networking variables. Understanding the social context and identifying the most favourable techniques for SME profitability are two of the most crucial tasks for managers who seek to successfully posit their firms in a new competitive environment.
Finally, the majority of studies that have examined the SME internationalization-financial performance association were conducted at least a decade ago. However, more recently globalization and rapid technological development have considerably changed the entire nature of firms, relating to both how they operate and how they are treated by external bodies. As a result, a more updated analytical examination of this topic was vital. Although Lu & Beamish, (2001) and Majocchi & Zucchella (2003) did not find a positive relationship between export activity and firm profitability, this study has successfully confirmed their arguments, almost two decades later. Acknowledgments
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50 Table 1: Exporting in each country
Country Minimum Maximum Average
52 Table 3: VIF test checking for multicollinearity
53 Table 5: Robustness Test
Regressions of return on equity (ROE) on export: 280 European SMEs, 2016-2018
Model 1 Model 2 Model 3 Model 4
